Gordon's kitchen nightmare

All illustrations by Jonathan Edwards

Despite better than expected tax revenues in January, the government is likely to have to record another substantial deficit this year. With Gordon Brown's "golden rule" looking distinctly tarnished, the already postponed 2007 comprehensive spending review looks set to be the most searching since the chancellor instituted the tri-annual review of public expenditure.

Every government department has to undertake a "zero-based review", in which it takes a fresh look at how it spends its money. The far-reaching nature of the exercise could lead to some radical conclusions, believes Brendan Nevin, director of housing at consultancy Ecotec and the brains behind the housing market renewal programme. Nevin says: "We are likely to see big changes by the time of the next comprehensive spending review."

At the same time, other sources of cash are drying up. The European Union structure fund regeneration money, which propped up large swathes of the UK devastated by the de-industrialisation of the 1980s and 1990s, is winding down. Many areas will no longer qualify for any support, while annual spending of structure funds in Merseyside and South Yorkshire will fall by a half. At the same time, the EU's approval for the UK's arrangements for gap funding developments expires at the end of the year.

Housing has benefited from an increase in public spending, although whether that money has been spent wisely has been an open question (see box, page 19). The good news is that housing looks set to be one of the very few areas that will continue to get extra investment in the CSR. The chancellor pledged in November's pre-Budget report that the government would provide another 10,000 social homes each year - that's on top of the 25,000 homes already being built.

Jim Bennett, a senior fellow at the Institute of Public Policy and Research, points out that apart from health, no other area of government activity has been given such positive signals. He says: "The Treasury has nailed its colours to the mast and it can't take them down without significant political risks. Housing delivery is going to be a priority for the third term. The issue isn't about whether the government is committed to achieving change, it's a question of what is the most effective way to do it."

But, like every other type of government expenditure, housing will not receive extra resources unless it can make a strong case that it contributes to economic growth. "Housing is going to be fighting a tight corner," says Bennett. "The response to Barker that we have just had still leaves a lot of tough questions."

Housing is going to be fighting a tight corner – the response to Barker leaves a lot of tough questions

Jim Bennett, IPPR

Here are some of the toughest questions Whitehall's men with the calculators are likely to be considering.

Decent Homes or new homes?

The first question is how the housing investment cake is going to be divided. Since the beginning of the decade, housing investment has been focused on bringing council housing up to scratch by 2010 through the decent homes programme. Bennett believes, given the amounts that have been invested already, that the government would be "very reluctant to miss" the decent homes target.

But Nevin believes the time is ripe for a thorough rethink of the principles underpinning the decent homes programme. "You can get some system-built properties up to decent homes without addressing the fundamental issues. There has been money spent on properties with little consideration of whether there is a long-term demand for them."

Richard Parker, infrastructure and government director at PricewaterhouseCoopers, agrees. "The spending review provides an opportunity to reflect on whether the focus needs to change. Does it make sense to continue to invest in decent homes when the homes may not be sustainable because they are not in places where people want to live?"

But Bennett believes that the level of existing commitments to arm's length management organisations means that there are few savings to be made by pruning back the decent homes programme. "It's going to be difficult for the government to make wholesale changes in terms of the overall balance of funds between reinvestment in existing properties and new housing. But the signals suggest that any increase in funding would be more likely to go into new housing," says Bennett, who adds that the chancellor hopes that some of the additional housing provision will be delivered with the help of efficiency savings.

London Housing Federation policy officer Dino Patel believes that the concentration on investment in new build will be good news for the capital. London's political arrangements mean that it is well placed to secure a bigger share of the cake, says Patel. "The mayor will have housing statutory powers and he will be having discussions with the chancellor. London is years ahead of the other regions, which are just getting their heads around setting up assembly and mayoral structures."

Money has gone on properties with little idea of whether there is a long-term demand for them

Brendan Nevin, Ecotec

Will infrastructure be the priority for funding?

Chris Brown, chief executive of the Igloo Regeneration Fund, believes that, based on discussions he has had with civil servants, social housing providers should not get too excited. "The government has got itself into a position where public spending is very tight and they can't afford to up the affordable housing spend. They can't afford to increase the size of the social housing budget back to the levels of the mid-1990s."

Instead, he believes that infrastructure is going to be the priority for investment. The shape of things to come can be glimpsed in the funding allocations, which the government has asked the regional assemblies to draw up over the past few months. Assemblies have been given carte blanche to say how they would like to see their housing, transport and economic development budgets divided up. Although the government is not obliged to heed the assemblies' advice, infrastructure investment has been identified by several as the key priority, even if it involves less investment in housing.

Nevin says: "What we are seeing is that the money for what we would have called regeneration is being converted to infrastructure funding. The city regional development plans are infrastructure-led and transport is coming across very strongly." Part of the reason for the shifting priorities is the extent of infrastructure needs identified by those charged with the task of implementing the government's growth vision. "It's going to take a lot more money than anybody thought to address some of the improvements in services and infrastructure. The aspirations that are set out are very difficult to deliver and the hurdles keep getting higher," says Nevin, who was in charge of the north Staffordshire housing market renewal pathfinder before joining Ecotec. The answers are likely to be contained in the Treasury's cross-cutting review of infrastructure, announced by Brown as part of the Barker response. "The whole focus of the government is going to be on how we get money for infrastructure," says Igloo's Brown. "The cross-cutting review is establishing a framework for a sustainable and cost-effective pattern of growth to ensure that sufficient resources across government are targeted appropriately," says Dominic Williams of Hewdon Consulting, who is an expert in how development values can be used to fund infrastructure.

Should the housing growth areas continue?

The outcome of the Treasury's review will have profound implications for the pattern of development in the growth areas. Indeed, it could determine whether the growth areas continue in their current form. "A lot of people are telling them that it makes more sense to make use of [existing] infrastructure than do it in a place like Ashford which needs a large amount of investment," says Brown.

There’s a large amount of money looking for investment opportunities

Julie Cowans, Joseph Rowntree

"I would expect to see an emphasis on delivering wider growth rather than everybody being focused on the growth areas," says Williams, who suggests that more marginal locations like Sheerness may find it hard to command resources. The chancellor's announcement of mini growth areas indicates that the government is starting to follow this line of thinking.

Design for Homes director David Birkbeck agrees: "I suspect we're going to see a lot more money being spent on the things that are likely to be successful," he says. "I'm not sure how successful the Thames Gateway is going to be, while I anticipate that Milton Keynes and Northampton are going to have their own momentum."

In the growth areas, the government is keen to see development pay for the costs of growth through the planning gain supplement, but that is looking tough to implement. "It's becoming increasingly difficult for anybody in the public sector to justify government intervention," says Williams.

Does estates regeneration need public money?

It is becoming even harder to justify government intervention in regenerating council estates, as the Treasury believes this can be achieved by using cross-subsidy from private development. Those piloting the government's new Mixed Communities initiative have been told that they will get lots of free advice but no cash. PRP Architects chairman Barry Munday says: "We have moved from a situation where the government was putting lots of money into a very focused problem like the Housing Action Trusts, where they were re-housing the same people, to a situation where they are trying to bring in private sector investment to cross-subsidise."

Bennett says that evaluation of existing initiatives, such as the hundreds of millions that have been spent on improving services in deprived areas through the Neighbourhood Renewal Fund, shows that existing public sector solutions have not made much difference in breaking up the acute concentrations of poverty found on such estates. Housing associations are already positioning themselves for a lower subsidy world by getting more involved in development for sale.

Julie Cowans, who has extensively researched Hope VI for the Joseph Rowntree Foundation, believes only the private sector can deliver the meaningful, large-scale change that is needed on many of the worst estates. "There's a large amount of money looking for investment opportunities," she says, suggesting that pension funds have the potential to more than plug the gap left by any shortfall in government spending.